2012 (4) TMI 190 - AT - Income Tax

Nature of Usance Interest assessee engaged in business of manufacturing of cables of different types imports raw material from parties who are non-residents finance charges/usance charges paid for availing credit under LC - whether usance interest comes within meaning of Section 2(28) assessee contending it to be partaking character of purchase price - taxability in view of DTAA between India and countries where-from raw material is imported dis-allowance u/s 40(a)(ia) for non-deduction of tax at source AY 02-03 - Held that - There was no nexus between the interest amount and fixation of the price of the raw materials purchased. Price of the material supplied was reflected in a separate invoice and interest paid for availing credit facility of 180 days from the date of bill of lading was reflected in separate invoice. The nexus of interest was only with the period from which the purchase price of the raw material became due viz., the date of bill of lading. Therefore, usance interest, is interest within the meaning of sec. 2(28A) and same would be deemed to have accrued and arisen in India in view of the provisions of sec. 9(1)(v)(b) of the Act. Taxability in view of DTAA between India and the respective countries Held that - Neither the AO nor the CIT(A) had discussed the issue in the light of the relevant DTAA. Therefore, we remand the issue to the AO for fresh consideration. Applicability of Section 40(a)(ia) In present case, payment is made to to non-residents and in the event of doubt the Assessee ought to have approached the AO for appropriate certificate u/s.195. He cannot plead bonafide belief to stand out of the said provisions. Addition of unutilized Modvat credit to the value of Closing stock Held that - Addition made by the AO as modified by the CIT(A) i.e. to allow it under u/s 43B if it is paid before filing of returns, has to be sustained but the AO should be directed to allow corresponding adjustment to the opening stock in respect of unutilized Modvat credit. - Decided partly in favor of assessee. Prior period expenses mercantile system of accounting AY 2001-02 - Held that - No infirmity is found in the order of CIT(A) allowing the claim of the assessee if these expenses are related to that year after verification. The same is therefore upheld Appeal of Revenue dismissed. Waiver of penalty for concealment dis-allowances in respect of write off of leasehold premium, prior period expenses, payment of gratuity, unexplained expenses AY 99-2000 Held that - It is seen that few dis-allowances have been deleted by Tribunal and dis-allowance in respect of write off of leasehold premium was then a matter of debate hence in view of Reliance Petroproducts (P) Ltd.(2010 (3) TMI 80 - SUPREME COURT) mere rejection of a claim for deduction made by the assessee will not give rise to imposition of penalty for concealment Decided against the Revenue.

Summary

Issues Involved:
1. Disallowance of Usance Interest under Section 40(a)(i) due to non-deduction of TDS.
2. Inclusion of unutilized Modvat Credit in the value of closing stock.
3. Disallowance of prior period expenses.
4. Imposition of penalty for disallowances made during assessment.

Issue-wise Detailed Analysis:

1. Disallowance of Usance Interest under Section 40(a)(i) due to non-deduction of TDS:
The assessee, engaged in manufacturing cables, paid finance charges (usance interest) to non-resident suppliers for delayed payment of raw materials. The AO disallowed the deduction of Rs. 18,31,162/- under Section 40(a)(i) due to non-deduction of TDS, treating the payment as interest under Section 2(28A). The CIT(A) upheld the AO's decision, citing the Supreme Court judgment in Transmission Corporation of A.P. Ltd. v. CIT. The assessee argued that usance interest is not interest under Section 2(28A) but part of the purchase price. Various case laws, including Visakhapatnam Port Trust and India Pistons Ltd., were cited. However, the Tribunal, following the Gujarat High Court's decision in CIT v. Vijay Ship Breaking Corporation, held that usance interest is interest under Section 2(28A) and deemed to have accrued in India under Section 9(1)(v)(b). The issue was remanded to the AO to consider the DTAA provisions and determine tax liability.

2. Inclusion of unutilized Modvat Credit in the value of closing stock:
The AO added unutilized Modvat credit of Rs. 2,51,713/- to the closing stock value under Section 145A. The CIT(A) upheld this but allowed the assessee's alternate plea to verify if the Modvat credit was utilized before the due date of filing the return and allow it under Section 43B. The Tribunal sustained the addition but directed the AO to make corresponding adjustments to the opening stock, following the Bombay High Court's decision in CIT v. Mahalaxmi Glass Works P. Ltd.

3. Disallowance of prior period expenses:
The AO disallowed Rs. 32,00,939/- as prior period expenses, stating that under the mercantile system, only expenses accrued in the current year can be allowed. The CIT(A) upheld the disallowance but directed the AO to allow the expenses in the year they pertain to after verification. The Tribunal noted that similar directions were upheld in the assessee's own case for earlier years and found no reason to interfere, dismissing the Revenue's appeal.

4. Imposition of penalty for disallowances made during assessment:
The AO imposed penalties for disallowances, including unexplained expenses under Section 69C, prior period expenses, write-off of leasehold premium, and provision for gratuity. The Tribunal noted that the disallowance under Section 69C was deleted in quantum proceedings, and prior period expenses were allowed in relevant years. The write-off of leasehold premium was based on a debatable issue, and the provision for gratuity was disclosed. Citing Reliance Petroproducts (P) Ltd., the Tribunal held that mere rejection of claims does not warrant penalties for concealment, thus upholding the CIT(A)'s cancellation of penalties.

Conclusion:
The appeals by the assessee were partly allowed for statistical purposes, while the Revenue's appeals were dismissed, with detailed directions for the AO to reconsider specific issues in light of relevant legal provisions and precedents.